Hong Kong's 10 years of change

Commentary: Former colony still enjoys special role in China

TonyMeasor

HONG KONG (MarketWatch) -- Chinese shares resemble a balloon that could at any stage be punctured and even a pinprick could deflate the market.

This could be said as easily in 1997 as it is today, at the tenth anniversary of Hong Kong's handover to China.

In 1997, the interest was on the so-called red chips, Chinese-run companies that were incorporated in Hong Kong. Of these, many were politically managed, and many had no real foundation. They were there to tap the gullible Hong Kong punters, one might refer to them as investors, and assets were injected into these conglomerate shells to lap up this surplus money.

That was a period of optimism bordering on euphoria, not much different from the conditions prevailing in the main two Chinese markets in Shanghai and Shenzhen today, when any new listing is oversubscribed, and is assured of immediately hitting heavenly heights.

These two Chinese markets are trading a combined turnover of nearly 300 billion yuan, or $38 billion. In 1997, there was merely a skeleton market in China.

The change has been astronomical, and the new companies in China, which barely existed just 10 years ago, can now compete in size with the largest U.S. interests.

PetroChina
PTR, -3.39%
(857), the largest Chinese company, has a market capitalization of 2.1 trillion yuan, equivalent to $270 billion. It's bigger than U.K. oil major BP Plc
BP, -1.54%
(BP), at $225 billion, but remains much smaller than Exxon Mobil Corp.
XOM, -2.76%
which has a capitalization of $465 billion.

Industrial & Commercial Bank of China (1398), the largest retail Chinese bank, had the highest level ever of subscriptions to its IPO, arranged internationally.

It's now capitalized at HK$1.46 trillion, or $187 billion, compared to Citigroup's capitalization of $260 billion and HSBC's capitalization of $215 billion. And ICBC is only one of the four largest banks in China; there are many other national banks as well as provincial and municipal ones.

In the decade since the handover, the commercial infrastructure of the banking sector has changed beyond recognition -- and it's still in its infancy. It would come as no surprise to see the overall level of profits earned in this industry alone overtaking U.S. banking profits within the next decade.

In the telecommunications sector, China Mobile
CHL, +0.29%
(941), known in 1997 as China Telecoms, now has the largest number of subscribers in the world, with a market capitalization of $215 billion and 2006 declared profits of $8.5 billion. Profits this year could well exceed $10 billion, in line with the best of U.S. telecom issues.

These are huge companies. And it's only China Mobile among these titans that was already floated in the earlier boom.

This is an exciting market, and even though prices are looking toppy, I would never give up on China as the greatest potential stock market in the world. China has the advantage of population, which is roughly four times that of America.

Yet markets do not go up in a straight line, and during this incubation period there have been three slumps in just 10 years.

First came the Southeast Asian financial collapse, in 1998, which pricked the bubble of the red-chip boom. Then there was the pinprick that signaled the end of the dot-com bubble, sometimes more correctly known as the boom in telecoms, media and technology stocks, emanating in U.S. in 2001.

Lastly, and largely in Asia, came the SARS epidemic of 2003, which killed nearly 300 people and made more than 1,500 ill.

Still, Hong Kong is a survivor, and the government had seen it through these rather nasty days, sometimes even during potentially rebellious opposition from a more vocal, or marching, public.

At the moment, Hong Kong sits contentedly waiting for, and exploiting, the crumbs that fall from China's table. That's why its residents have enjoyed, with occasional reservations, the meals that have followed from the transition from a British colony to being a part, albeit a special part with its own regional government, of China.

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